The document confirms HM Revenue & Customs (HMRC) is still working towards an April 2020 roll-out date for the reforms, much to the dismay of campaign groups and contractor-focused trade associations, which have repeatedly called on the government to delay its plans.

“We can only hope that the incoming prime minister will recognise this measure for what it is, and scrap it altogether,” added Bryce.

All change on IR35

Under the terms of the proposals, private sector organisations will assume responsibility for determining if the contractors they engage should be taxed in the same way as salaried employees (inside IR35) or off-payroll workers (outside IR35).

These decisions should be based on the nature of the work they do, and mean individuals who are deemed to be working inside IR35 are liable to make the same tax contributions as full-time employees, but without being eligible for paid holiday or sick leave, for example.

“We can only hope that the incoming prime minister will recognise this [private sector IR35 tax avoidance legislation] for what it is, and scrap it altogether”
Chris Bryce, IPSE

This is about how the changes HMRC is proposing could drastically increase the administrative burden private sector organisations find themselves under, and may even prompt some to wind down their reliance on flexible workers as a result.

The impact on IT contractors

Paul Middlebrook, a director at IT infrastructure consultancy Azation, relies on a mix of full-time staff and contractors to assist its clients on the design, implementation and management IT projects.

“Because of our size, we typically engage our clients via standard IT contracts – so we appear to be a public services company,” he said. “We pay PAYE tax for our permanent staff, plus National Insurance and corporation tax on any profits that remain – everything we do is legal already.”

However, he fears the roll-out of the reforms are liable to cause confusion among the clients it engages with because of the mix of workers it employs. This, he fears, could lead to a loss of income.

“Clients will not understand how we operate, and because of IR35 we will therefore be treated as employees – with the associated additional tax burden/loss of income. I also worry that clients will not understand the wider legislation and will reduce or stop using organisations such as ours,” he said.

The private sector reforms are specifically targeted at clamping down on tax avoidance by contractors working for medium-to-large businesses. But it is small to medium-sized enterprises (SMEs) that will bear the brunt of the reforms, said Middlebrook, because the vast majority of the contractors such organisations engage will come from small-scale consultancies.

“As a small business, we will be directly impacted by legislation that is not intended to target us – we are the bottom of the stack and will suffer from any issues that impact medium and large businesses. We have already seen the impact directly in the public sector clients,” he added.

Problematic legislation

Digging into the draft legislation itself, Dave Chaplin, CEO of IR35 consultancy ContractorCalculator, raised a couple of red flags about its contents, which he fears could create even more problems for the contractor community later down the line.

“Under the existing Chapter 8 IR35 rules, contractors decide their IR35 status after the work is done, using the known facts to build the hypothetical contract,” he said.

“Under the new rules, the hiring firm must make an assessment of tax status for someone before they start work, and before the full facts are known. It’s like trying to judge someone before they commit a crime.”

He continued: “Worse still, if the hirer decides you are going to be within the rules [in future], they [can] then deduct tax from source, and there is no way to appeal the full tax at a later date.

“This is because the largest portion of the tax they deduct from their costs is employers’ National Insurance. Contractors cannot get this back at a tax tribunal, because they never paid it – their ‘deemed employer’ did.”

HMRC has confirmed it will be consulting on the draft legislation until 5 September 2019, and the final version of the legislation is due to drop as part of the March 2019 Budget.

While the IR35 reforms might not be to many people’s liking, Mike Butchart, CEO of contractor-focused accountancy firm, QAccounting, said the emergence of the draft legislation should be seized on by the private sector now so they can start preparing for the April 2020 go-live date.

“With the release of the draft legislation, recruitment agencies and medium and large engagers can start putting processes in place to manage reform next year with a degree of certainty,” he said.

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This article has one inaccuracy. Contractors who are deemed to be inside IR35 must pay the EMPLOYERS NI as well as Employees NI. This is why it is so unattractive to contractors, because we lose an additional 11% nett pay, compared to permanent employees and get none of the benefits. Personally I don't mind whether I pay income tax as I go or pay tax on what I pay myself from my limited company, who also has to pay corporation tax and charge VAT. The nett amount to me is the same. However it's the Employers NI I really object to paying. If they can get the employer to pay the employers NI when using contractors there would not be nearly so much objection.